Question

) Ferrarri produces exotic cars in Italy, most of which are exported to foreign countries. What happens when the price of these cars rises? A Italian GDP deflator rises; Italian CPI is unchanged. B. Italian GDP deflator and CPI both rise. C. Italian CPI rises, but Italian GDP deflator is unchanged. D. Italian CPI and GDP deflator are both unchanged.

Answer 1

Answer — A . Italian GDP deflator rises; Italian CPI is unchanged.

Explanation:- An increase in the price of car will increase the real GDP ,which in turn will increase the GDP deflator of Italy. GDP deflator =(Nominal GDP/Real GDP)×100

Suppose nominal GDP is 125 and real GDP 100 then GDP deflator =(125/100)×100=125 , Now suppose car price increases so that nominal GDP =150 but real GDP is same 100( real GDP increases when production increases) so now GDP deflator =( 150/100)×100= 150.

CPI measures the change in the price of a particular basket of commodities in Italy, but as most of the cars are exported so CPI will remain unchanged.

(Note— CPI is affected by change in the price of imported goods because it comes under the consumption basket, but it is not affected by the change in price of the exported goods as it doesn't come under the consumption basket. )